Investment Moats

What we can expect from LTE for Starhub, Singtel and M1

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The next generation of telecom wireless delivery after 3G will be LTE but how would that impact the telecoms?

Starhub and Singtel will be rolling out LTE in the second half of the year 2012.

What we do know is that US telecoms Verizon and AT&T have started the roll out with LTE enabled devices such as the new IPAD.

  1. Tiered Pricing. The three telecoms are saying they have the intention to move away from buffet telecom plans. But none will take the first steps. Expect Singtel to be the leader in this. Bad for consumers but the effect will be felt differently by usage patterns.
  2. LTE faster. From the usage trends if you do light data usage you should not be adversely affected. However based on the reports coming in from the new IPAD in US, a 5GB $50 plan can go down in a matter of days if the users use the phone for 720p video streaming.
    1. "All the advantages of the iPad device are completely neutralized by the two gigabyte data limit,"
    2. What many consumers may not realize is the new iPad’s faster LTE connection means they will use more data even if they don’t change their 3G surfing habits. Take regular video: Verizon estimates that streaming it over an LTE connection runs through 650 megabytes an hour. That’s double the amount of data used streaming the same video over a 3G link, because the fatter pipe lets more data through.
  3. Pricing of plans will not come down. Essentially we are likely to see increases in data limits as time passes but just enough for users to have an adequate experience.
  4. Telecoms are expected to deliver data at a lower cost. But data delivery will be more.

All this points to a better landscape as of now to the telecoms.

Are we really at Peak Telecom?

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We just wrote an article talking about the defensiveness of telecoms as a service utility that people cannot live without. But I have talked much about telecom may not always be a fool proof cash generating business model [read here].

Here is another good telecom evangelist talking about it. Martin Geddes [profile here] have quite a profile talking about technology ecosystems especially on telecoms. U can follow future talk on the industry [here]

If you are big in telecom stocks, its good to read it as part of forming your own perspective.

Peak Telecoms >>

Here are my thoughts on how likely this will impact the Singapore Telecoms

  1. You are starting to see it. The ARPU is not jumping. There isn’t much drivers for the 3 telecoms. They are fighting for each other’s customers. At most they are upselling mobile data plans. Will this change with LTE? More deployment cost, but still little switching cost.
  2. Local content is non existent. The telecoms have a problem because in this part of the world piracy is rampant. Content piracy that is. You have China set top box and bit torrent of your favorite shows. But another problem is that, unlike other countries where there are local language content, there isn’t much for Singapore! People still like their Hong Kong shows, American shows and English Premier League more.
  3. The telecoms are not competing well on the cloud computing, value added service front as well. The people would prefer their Hotmail. Gmail and Yahoo Mail. To get cloud storage they would rather go Dropbox or Box. Why get it from Singtel if its more expensive but yet do not offer more upside? Perhaps its faster? Much of the Content have been delegated to Apple, Google and these Web 2.0 companies to provide.
  4. So if they have no value add and what we hold dear (contact list, number) is portable then what is Singtel, M1 and Starhub to us? A data pipe essentially.That is a commodity in itself. What is this pipe made up of? Cell towers and a intricate network of fibers and computers.
  5. With the setup of NBN Fibre Broadband it becomes an open market for competitors to setup their own broadband offering. Think there are no competitors? Perhaps you can check out ViewQuest, MyRepublic. On Hardwarezone you are starting to see adoption.
  6. We talked abit about FemToCell as an alternative to your Singtel, M1 and Starhub cell station via a well established fibre network. The missing ingredient now is a better WIFI offering. Next Gen WIFI could be the case. It lets your phone to easily switch between 3G/LTE and WIFI on its own upon detection. This is a boon for bandwidth intensive areas for Singtel, M1 and Starhub but more than all, with Fibre, Good Wifi Technology, cheap telecom equipment from Huawei, you can really make a play at the incumbents.
  7. These startups like ViewQuest and MyRepublic probably will not kill Singtel, M1 and Starhub, but will make them sit up to take notice that people can come in and compete cheaply. Margins will be eroded.
  8. Remember that this region is famous for piracy and China products? There are many China set top box on offer playing PPTV, PPStream providing free chinese content and probably English ones. What happens when they come with FemToCell? It allows smart startup to develop a crowd sharing ISP.
  9. The people are cheapskate and probably looking for viable cheap alternatives and if startups do it well, sooner or later people are going to realize there are alternatives and I do not have to stick with Singtel, M1 and Starhub who does not listen well to my needs.
  10. As Investors, it will be easy to see.
    1. Monitor the quarterly report of all three telecoms. If their local ARPU and Net Adds are all falling, you know they are feeling the heat.
    2. If you are in it for the dividends, when free cash flow is consistently less than dividend payout, that is a red flag.
    3. On the ground you will hear of it. Relatives and friends will tell you this hot new start-up or entry that delivers a cheaper mobile strategy.

    For now, the telecoms still are doing well. Lets see what happens in the next 2 years. 

    11. I run a free Singapore Dividend Stock Tracker . It  contains Singapore’s top dividend stocks both blue chip and high yield stock that are great for high yield investing. Do follow my Dividend Stock Tracker which is updated nightly  here.

Investment Moats Weekly Reads 8 Feb

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Investment Moats Weekly Reads 29 Jan 529021066

Here are this week’s reads

Money Management, Portfolio Management

  • Learning from your own mistakes, framing solutions to combat them in the future [TBP]
  • Can you sum up your investment philosophy in 10 words? [WSJ]
  • Health Tips for Traders [Stock Sage]

Technical Analysis, Cycles and Sentiments

  • How do you know you are in a forgiving market? Be vigilant [Stock Sage]
  • The 3 stages of a bull market, sentiment wise [Ivan Hoff]
  • How bullish are Golden Crosses [TBP]
  • S&P 500 to 1517 according to Peter Brandt [Peter Brandt]

Dividend Investing

  • A good article on 12% yielding stock in Lee Metal [Next Insight]
  • The 40 best dividend stocks in the world [Business Insider]
  • Should large cash holdings be paid out or bought backed? [Aleph]

Personal Finance, Budgeting

  • The sad plight of Singapore’s fav football son Fandi Ahmad [Singapore Mind]

General Trends, Individual Stocks and Miscellaneous

  • For folks who does negotiating in their job, a list of Dos and Don’t [Inc.]
  • For telecom investors – a future model:leasing phones[GIGAOM]
  • SOPA is wrong – Piracy indirectly helped Angry Bird [Android and Me]
  • How to be happy at work! [Inc.]
  • Apple’s pricing paradox [Asymco]
  • An in depth look into why clean energy is not working [Wired]
  • The 3 technologies that is going to change the world [WSJ]

Don’t miss the best articles of Investment Moats (iMoat) sponsored by TradeStation

If you like Investment Moats, do support us by Liking us or +1 us below!

Starhub FY2011 Results–Back to stable cash flow levels

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Starhub announced their full year 2011 financial results. Overall, my take is that they got back to pre-iphone competition level of operations. I would not say it is spectacular but rather, the reasons operation wise, why we like Starhub is finally back.

Here are some of my takeaways:

  1. Profitability
    1. Gross profit 4th quarter grew by 15.3%. Considering the handset subsidies costs over the past 2 years, its good to see that growth is maintained.
    2. Gross profit full year grew by 16.3%. Considering past 2 years of competitive landscape, its good to finally see growth overall instead of profit drawdowns year on year.
  2. Business Segments
    1. 4th quarter mobile revenue grew by 3.1% and full year mobile revenue grew by 3.1%. A note that mobile revenue is the biggest contributor to the top line.
    2. 4th quarter Pay TV revenue grew by 7.5% while full year Pay TV fell by 4.9%. This is the only segment that shows negative growth owing to the loss of BPL. Here is where competition is intense and we do not yet have visibility how the new IDA rules on cross carrying of content will do to Starhub’s Pay TV.
    3. 4th quarter and full year broadband grew by 2.7% and 2.4% respectively.
    4. Fixed network grew by 1.5% overall.
    5. We are seeing a 5% fall in pre-paid mobile revenue versus a 5% rise in post-paid mobile revenue. The ratio of pre-paid to post-paid revenue is 1:3.88.
    6. Post-paid ARPU was S$76 for the quarter versus S$73 last year. Higher ARPU was due to higher subscription revenue from increasing mix of “SmartSurf” plans, which is their 3G voice and data plans.
    7. In terms of voice calls to data usage, there is a 9% reduction in voice calls and a 16% rise in overall data usage, reflecting a shift towards data. This trend looks set to continue and had it not for the bundled plans, it will be difficult for the telecom to explain to end user why they still pay S$44 for a voice+data plan.
    8. Post-paid churn have increased to 1.2% versus 1.1% last year. This is somewhat of a small concern as although it is relatively small, would indicate that given the release of the same set of iPhones and Android phones, consumers would prefer competitors more than Starhub.
    9. Pay TV ARPU was lower year on year. However, churn remain constant. This shows that to retain customers, the margins are affected to offer more competitive packages.
    10. Broadband ARPU was lower year on year as well.
    11. Fixed Network Services was the surprise where they grew Data & Internet by 1% and Voice services 4% for the year. Data accounted for 5 times that of Voice.The higher take up was attributed to increase take-up for NBN services by retail service providers.
    12. The higher voice services revenue was attributed to higher subscription of local voice services and increased interconnect revenue but offset by lower IDD revenue.
  3. Business Costs
    1. We are seeing a 22.8% rise on cost of equipment sold due to higher subsidies of smart devices. Particularly significant is the 68% rise in cost of equipment for the 4th quarter which looks to indicate that more smart devices are sold and greater subsidies are required. This will only get worse when LTE gets deployed next year and more subsidies are required to make people switch to LTE compliant handsets.
    2. We are seeing a 6.8% rise in Staff costs and 8.5% rise in Marketing and Promotion costs versus a drastic reduction in Operating Lease, Repair and Maintenance and other expenses. Probably my gripe here is that costs are rising much faster than the added revenue.
  4. Cash Flow Analysis
    1. Operating Cash Flow was significantly lower due to higher inventories and receivables for the quarter. This come as a surprise but perhaps is an operation decision to hold more stocks.We will need to observe future operating cash flow for tell tale signs of stress in operational cash generation.
    2. I was surprise by the high capital expenditure of 116 mil in 4th quarter versus the previous three quarters which add up to almost 120 mil. Last year this time the capex is also very high in the 4th quarter. Capex remains 10% of operating revenue inline with company full year guidance.
    3. We were expecting much lower capex so this was against my very own estimates. It looks to follow the management capex guidelines of not more than 11% of operating revenue
    4. Free cash flow was S$450 mil versus S$400 mil full year. This is greatly attributed to increase in operating cash flow due to higher depreciation and lower capital expenditure.
    5. Dividend payout remains at S$343 mil for $0.20 dividend payout. This is higher than net profit but well within the free cash flow levels
    6. Capital expenditure was S$246 mil versus S$277 mil of depreciation, showing a consistent replenishment of assets, thus Starhub do not run the risk of erosion of NAV.
    7. Net debt repayment was S$143 mil versus S$90 mil last year. This shows management’s commitment to reduce debts
  5. Debt Analysis
    1. Net debt was S$483 mil versus S$568 mil last year. Management looks to continue to use excess free cash flow to pay down debts
    2. Net debt to assets is at 31% which is at a comfortable level
    3. Net debt to EBITDA is at 0.69 which is at a very healthy level, far lower than the 1.1 level management is targeting.
    4. With a free cash flow of S$450 mil it also means that by not paying any dividends, Starhub can theoretically pay off their debts in 1.07 years.
  6. Growth outlook for 2012
    1. There will be a continued shift from voice to data
    2. Content cost will remain high despite the new cross carry guidelines
    3. Take up for NBN is set to continue but currently hampered by operational issues which are pending resolution with various parties.
    4. Revenue growth is forecasted to grow in the low single digit range.
    5. EBITDA margin as a percentage of service revenue is set to remain at 30%
    6. Capex guidance is expected not to exceed 11% of operating revenue
    7. Dividend payout to remain at 20 cents

Conclusion

I was somewhat disappointed that there isn’t much mentioned of their plans to differentiate from the competition. I written recently the future trend of telecoms in Singapore (read here) and it would be paramount that with a LTE and NBN pipe, Starhub provides the best content to shift subscribers or provide the best QOS.

Else they will end up in this endless lowest switching cost game.

My forecast of higher dividends looks set to miss since free cash flow is forecasted to be lower than S$450 mil this year and  capital expenditure will not significantly reduce.

Still you ask yourself whether you are contented with a currently yield of 7% for a service utility that people will continue to use for the foreseeable future.

Disclosure:Vested

I run a free Singapore Dividend Stock Tracker . It  contains Singapore’s top dividend stocks both blue chip and high yield stock that are great for high yield investing. Do follow my Dividend Stock Tracker which is updated nightly  here.